BY: ALAN M. ZUCKERMAN and TRACY K. JOHNSON
Dr. Zuckerman is director and Ms. Johnson is manager,
Health Strategies & Solutions, Inc., Philadelphia. This
is the final in a series of articles on revenue growth in
Health Progress.
More than a year ago we began a series of articles for Health
Progress aimed at helping hospitals and health systems focus
on revenue expansion. Over the past year we have been encouraged
by feedback and observations from the field; there appears to
be an increasing balance now between growth efforts and cost
containment and reduction initiatives.
The dilemma facing some organizations is how to return to
revenue growth; for others, it is how to turn revenue enhancement
into a major organizational focus. Previous articles in this
series examined revenue enhancement opportunities by key categories
and described how these opportunities could be capitalized on.
This final article presents a practical framework for beginning
or accelerating the revenue enhancement process. This framework
has been employed successfully, with minor variations, in dozens
of health care organizations. If revenue growth is high on your
organization's agenda, this framework should assist in improving
the process.
How to Get Started
The initial stage should involve two concurrent components:
an objective assessment of progress to date and identification
of needs and goals for the next one to three years. The assessment
should address the following questions, at minimum:
- How has revenue changed in the aggregate over the past
three years?
- For each major subsidiary or business unit, what have been
the trends in revenue over the past three years?
- For key programs or services during this period, what has
been the three-year trend?
- Where in the organization is revenue increasing greatly,
and where is it decreasing greatly?
- In regard to each of the above, why has this occurred?
- What major growth initiatives have been attempted in the
past three years, and what have been the results?
Depending on the organization and the scope and extent of
its programs and services, a more detailed performance analysis
may be appropriate. The goal of the assessment is to understand
the basis for revenue generation and/or changes by a key program
area and to evaluate the organization's track record in developing
new revenue opportunities.
Future needs and goals can be determined by the following
key considerations:
- What are the overall and business unit targets for growth
for the next one to three years?
- What contribution margin thresholds must new or expanded
initiatives meet? What other high level (e.g., mission-related)
factors must be considered and how?
- To what extent should revenue growth focus on core businesses
versus other businesses? How much effort should be directed
to new versus expanded programs and services? To new versus
existing markets?
- What role should acquisition or strategic alliances play
in business development?
Planning staff analyses and management team review, input,
and discussion of recent history and future needs and goals,
including the points outlined above, should result in a good
start to the revenue growth planning process.
A brief illustration further clarifies this process. We've
worked with half a dozen health care organizations that have
experienced static overall revenues or slightly declining revenues
over the past three years. Despite attempts to shrink their
expense bases to operate in a financially viable manner at these
reduced revenue levels (actual or inflation-adjusted), the efforts
were largely unsuccessful. In each case, a "stretch" target
of 6 to 8 percent annual average growth in revenues was established
for the next three years. With renewed energy being focused
on judicious growth, budgeted growth levels are being realized
(one to two years after implementation) along with improved
financial performance resulting from increased contribution
margins and, in nearly all cases, better service to their communities.
Identifying Potential Opportunities
As the preceding articles in this series have highlighted,
myriad sources are available to draw on to identify potential
revenue enhancement opportunities. The objective at this stage
is to develop as complete a list as possible of the opportunities
for evaluation and ranking in subsequent steps of the planning
process. Typically, the opportunities are also defined, so they
are consistently understood by leadership, and described succinctly,
so that the nature of each opportunity and its magnitude are
also clear and consistently interpreted.
There are three broad approaches to opportunity identification.
Strategic Plan and Other Source Document Review Numerous
opportunities are often already identified in the organization's
strategic plan and other key documents. Reports — such as patient
satisfaction survey findings, medical staff survey findings,
other market research, and special program studies — are terrific
source documents for opportunity identification and are usually
readily available for review. Sometimes the opportunities are
already defined and described in such documents but not yet
acted on; other times they lie a little below the surface, waiting
to be dug out by the careful analyst.
Macro Analysis It is generally advisable to conduct
macro analysis of the organization and its environment to discover
additional revenue enhancement opportunities. Many organizations
already have such analyses available in the form of an annual
environmental assessment or strategic plan update. For others,
supplementary effort will be required. In carrying out such
an analysis, dissecting the organization's situation or environment
in a highly detailed manner it is not necessary or advisable
at this point. This analysis should include sufficient detail,
however, on the main topics of previous articles in this series:
market share, service area, continuum gaps, market niches, and
target segments.
Qualitative Input Input from many levels and perspectives
from inside and outside the organization are valuable sources
of additional opportunities. The challenge is to structure a
process that maximizes the possibility of gaining the most complete
input but minimizes time and effort spent on collecting it.
In general, group input sessions, using structured brainstorming
techniques, are the best way to achieve this balance. These
sessions can involve selected, diverse representatives from
various levels and constituencies of the organization, structured
into sessions of six to 10 persons each. For example, different
sessions may include directors of various departments, physicians,
and community leaders. Another approach is to organize the groups
along program or service lines to identify opportunities by
those most familiar with the service and market.
As a result of these three steps, it is not unusual for 20,
30, or even 50 opportunities to be identified in a large organization.
The challenge from this point forward is to narrow the list
of possibilities to a manageable number. To narrow the list
and to properly conduct the type of prioritization process described
in the next section, it may be necessary to expand the information
base relative to each initiative. At the very least, a summary
business plan for each opportunity identified (which may also
involve transformation of the opportunity into a concrete initiative)
is usually required. Here, too, it is possible (and sometimes
necessary) to develop a feasibility study or full business plan
for some or all the opportunities. This process should result
in the elimination of the weakest or least likely opportunities
from further consideration, which will allow the organization
to focus on the more promising initiatives.
Prioritizing Identified Opportunities
A step that is often skipped in the revenue enhancement planning
and implementation process is that of prioritizing identified
opportunities. Some providers go directly from opportunity identification
to implementation for one of the following four reasons:
- The need to immediately implement some or all identified
opportunities is apparent
- Leadership has an intuitive sense regarding the priorities
- The need to move forward is so intense that some are not
willing to take the time to screen and evaluate the opportunities
- The early momentum of the process propels management directly
into implementation
However, because few organizations can or should implement
all their identified opportunities, some relatively objective
method for determining priorities is needed.
Concurrent with the opportunity identification step, and before
any concrete opportunities emerge, it is a good idea to develop
a framework for prioritizing and ranking initiatives. When developed
at this time, the framework is usually free of any biases that
might be introduced by the awareness of specific opportunities
by organizational leaders and the resulting desire to ensure
that the evaluative process is structured so that certain opportunities
emerge as priorities.
The prioritization framework typically includes specific criteria
and a weighting system as appropriate. At a minimum, the following
four criteria should be considered:
- Mission enhancement. To what degree does the proposed
initiative advance or satisfy the organization's mission?
- Organization's capabilities. Does the initiative
draw from, build on, or enhance any particularly strong existing
capabilities? Will unique capabilities be developed as a result
of this initiative? Is there a lack of essential capabilities
that will be remedied by pursuit of this initiative?
- Market conditions. Is there growth or change in
the environment that this initiative capitalizes on? Is there
much direct competition now, and is this situation likely
to change in the next few years? Is the competition weakening
or strengthening? Are there new technologies or approaches
that will strengthen or undermine the market for this initiative
in the next few years?
- Reimbursement/financial impact. Is the reimbursement
for this initiative favorable, not favorable, improving, or
likely to deteriorate? Is the likely financial performance
very good, good, fair, or marginal? Does pursuit of this initiative
require significant capital? Does pursuit of this initiative
require any special resources that may be difficult to obtain?
What degree of risk is associated with carrying out this initiative?
More sophistication in these questions is possible and, in
some instances, will be necessary. Key areas for expanding this
framework are adding new criteria, subdividing some of the criteria
described into multiple criteria (e.g., finance can be subdivided
into margin, capital needs, risk) and weighting criteria so
that some may be accorded greater importance.
Once these steps have been completed, the prioritization process
can be carried out based on the initial business case developed
for each initiative. Typically, a leadership group reviews all
the proposed initiatives and then individually scores each proposal.
The group then meets to compare individual rankings and discuss
each proposal. A final composite score is the result. Depending
on the goals for revenue enhancement identified at the outset,
a number of the highest priority initiatives will be recommended
for near-term implementation, possibly followed by groups of
second- and even third-order priorities. In some organizations,
the ranking process is more elaborate, with input secured from
medical leadership, multiple management groups (especially in
very large systems), and even the board before a final set of
recommendations is made.
A Catholic-sponsored integrated delivery system in the Northeast
went through such a process for the first time in mid-2001.
A group of eight senior managers in the system, including all
senior vice presidents, some business unit leaders, and planning
staff, evaluated approximately 20 revenue enhancement opportunities
through a process nearly identical to that described here. This
approach included a ranking of 1, 2, or 3 regarding the degree
to which the proposal satisfied the criteria described and a
double weight applied to the financial impact criterion. A maximum
score of 15 was possible for any proposal. The 20 proposals
had composite scores ranging from six to 14, with five proposals
scoring 12 or higher. These high-scoring proposals were recommended
for concurrent immediate implementation. A second group of three
proposals is scheduled for implementation this year, pending
the results of the initial implementation efforts.
Implementing High-Priority Opportunities
Resist the temptation to implement too many initiatives at
once! There is a tendency to charge ahead on multiple fronts
in these revenue expansion planning efforts, propelled by the
excitement of having many opportunities and aided and abetted
by the momentum generated in the planning process, including
the interests and appetites of those outside senior leadership
who may have a role in or benefit from one or more of the initiatives.
One often overlooked challenge is maintaining organizational
enthusiasm and interest, even if only a small fraction of the
identified opportunities are actually pursued immediately. Pent-up,
unsatisfied demands for growth and disaffected constituencies
can be a major barrier to success in this process. Be realistic
about how much the organization can take on at any one time
and manage implementation judiciously.
Many implementation structures are possible, but at a minimum
this effort should include for each initiative a task listing,
assignment of responsibilities, schedule, and significant incremental
resources required. Specifying in advance how, when, who, and
what it will take to successfully implement the priority initiatives
will go a long way toward achieving success.
Implementation may begin even as planning is in its concluding
phase as long as the proper controls are in place to manage
the process. In most health care organizations, implementation
of any given initiative is carried out by one primary individual,
often supported by a few others or even a team.
Some organizations have a difficult time making the transition
from planning to implementation and continue to study the opportunities
past the point of diminishing returns from the analysis — and
occasionally so long that implementation never occurs. As noted
earlier, other organizations rush prematurely from planning
to implementation, which results in limited success at best
and chaos at worst. Experienced managers can make the intuitive
judgment as to where and when to transition from planning to
implementation.
Once implementation begins, the role of senior leadership
generally shifts to ongoing monitoring, evaluation, and redirection
as necessary. Depending on the scope and extent of implementation,
formal monitoring may be advisable on a regular basis (weekly,
monthly, etc.). Formal monitoring should include review of all
key elements in the implementation plan for each initiative,
with particular regard to variances from what was originally
anticipated.
Only rarely do plans proceed exactly as envisioned and achieve
precisely the results initially expected. Modifications to the
implementation plan are normal and are not a sign of flawed
planning or implementation failure. The discipline of ongoing
evaluation facilitates identifying these adjustments and achieving
the best results possible.
In some cases, however, major obstacles are encountered, including
changes in external conditions, and implementation may need
wholesale revision or perhaps abandonment. Even in these extreme
circumstances, the ongoing monitoring process builds in opportunity
for anticipation and consideration of such situations. The well-managed
organization with a well-designed implementation process will
take such situations in stride, address them directly, and continue
to move forward on as many fronts as possible and deal evenly
with both the successes and failures that result from this important
effort.
Copyright © 2002 by the Catholic Health Association of the United States
For reprint permission, contact Betty Crosby or call (314) 253-3477.